AN OPEN PLEA TO THE STUPID
I will leave the thread open so I can try to answer questions as I am the thread starter so if you have questions, go ahead and ask; but please, my gawd, PLEASE keep all stupid, irrelevant, comments to yourself. Thread contamination, to quote Stephen Colbert, "Warps the minds of our children, and weakens the resolve of our allies." So please for the love of all things Forex, stop contaminating threads.. especially MINE. If you disagree, kindly post, "I disagree, I have posted my argument in my own thread [link here]" You get no respect because you give no respect. My goal is to contribute to the FX society what I have learned, not to breed stupid comments.
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In my search for the grail; there are a few concepts that I came across in my early days, that later on, not only proved to be false, but the exact opposite was true.
One of these is the concept that trading shorter timeframes has lower risk because your stops are tighter in terms of pips.
So.. the WRONG THEORY:
I buy a position on the 1H chart, and I put a stop at the local low with a 40 pip Stop-Loss. My risk is 40 pips.
If I bought a position on the Daily, maybe I put a stop at the local low and that might be 150 pips away. My risk is 160 pips.
Thus, when I have a small purse to play with, playing in the shorter timeframe seems to be more prudent; because I can "trade" 4 times in the 1H for the same amount of pip risk as that of trading once in the daily.
This, like everything else in FX, seems intelligent and logical.. And this (consequently) is what most newbies do.
The problem with this is that this is true IFF (IFF means IF and ONLY IF) you do no Money Management. And so thus, the newbie is hit double whammy, not only are the trading under the wrong assumption, they are trading under no MM..
The Math of It..
The math of the original WRONG theory:
I buy 1 lot on the 1H chart, my SL = 40 pips. Max Risk = -$400.
I buy 1 lot on the Daily chart, my SL = 160 pips. Max Risk = -$1600
Therefore, Daily has 4x the risk of 1H.
BUT..The landscape quickly changes when you have MM.
I have $10,000 in the piggy bank, I'm willing to risk up to 4% per trade.
4% of 10,000 = $400
If I bet 4% on the 1H chart with SL = 40.. then $400 / 40 pips = $10 / pip = 1 lot. I can therefore bet 1 lot.
If I bet 4% on the Daily chart with SL = 160 pips.. then $400/160 = $2.5 / pip meaning I can buy only 2.5 minis (25 micros).
From a percentage point of view, they are equal in risk, because we take an MM perspective.
BUT, what is now even more interesting is, when you apply movement of tick per unit time, the DAILY has less risk per unit time!
The reason is, while we are risking 4% in both cases, on the daily, the 4% is distributed over 160 pips, while on the hourly, it's distributed over only 40 pips. Given that a pip in movement is a pip in movement regardless hourly or daily, then, per unit time, you are taking on less risk per pip on the daily.
This is a staggering revelation, since that means, betting on the daily, your ability to recover from a bad position, is actually BETTER (ironically) because of pip-to-percent risk distribution.. BUT, the sword has double edge, and this, per pip gain is also reduced on the plus side.
It would then seem, that those with smaller purses should actually play longer timeframes instead of shorter ones, when you take MM into account, and thus play smaller lot sizes, giving them the ability for deeper stops to avoid whipsaws, recover easier from a bad decision. While this will result in also slower growth of fortune, that seems to be a great tradeoff if longevity in the game, is something the newbie seeks (and it should be).
If you find this and other threads helpful, please don't post any thank you posts to it. Please post only if you have questions.. Let's keep the information in the threads, so it serves the community better. If you didn't find this thread useful, then don't read it!
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